安森美 (ON) 2002 Q2 法說會逐字稿

Welcome to the ON Semiconductor second quarter release earnings conference call.

All lines will be in a listen only fashion until the formal question and answer session.

At the time, instructions will be given.

At request of ON Semiconductor, today's conference call is being recorded.

I would like to introduce Mr. Gary McAdam, Director of Investor Relations for ON Semiconductor.

Sir, you may begin.

Good afternoon and thanks for joining us for ON Semiconductor's second quarter conference call.

In a moment I will introduce Steven Hanson, our President and Chief Executive Officer.

Also joining the call will be John Kurtzweil, our Chief Financial Officer.

Each will cover the progress we have made in the second quarter.

After we have heard from both Steve and John, we'll reserve 15 minutes from Q&A.

First, I'd like to highlight our upcoming even calendar.

ON Semiconductor will be presenting at the US Bancorp Piper Jaffray Technology and communications Conference on August 8.

The Soloman Smith Barney Tech Industry Conference 2002 on September 1, and the Deutsche Bank Global IU Conference on September 21.

During this course of this call we will make projections or other forward looking statements regarding future events or the future financial performance of the company.

The words estimates, intends, expects, plans or similar expressions are intended to identify forward-looking statements.

We wish to caution that such statements are subject to risk and uncertainties that could cause actual events to differ materially.

Important factors relating to our business or factors that could cause actual results to differ from a forward-looking statement are described in our 2001 form 10-K and other filings with the SEC.

The company assumes no obligation to update forward-looking statements to report actual results or change assumptions or other factors.

Now let's hear from our President and Chief Executive Officer, Steve Hanson who will provide an overview of the second quarter.

Thanks, Gary.

And thanks to everyone for joining us today.

Good afternoon to all of you.

The second quarter was a significant turning point for the company.

We posted a positive cash flow one quarter ahead of plans.

And increased our gross margins from 22% in the first quarter to 27% in the second.

Our total revenues and backlog were up sequently for the second consecutive quarter.

We've exceeded our first call consensus earnings per share estimate.

We're now shifting our focus from repositioning the cost structure of the company to growing the business.

The July 2002 issue of Semiconductor Magazine listed us as one of the top four semiconductor companies for percentage increase in operating income.

We've demonstrated the cost control measures we put in place last year have put us ahead of the competition in terms of our bottom line improvement.

We attribute a lot of that to our continued growth and pervasiveness across all markets and regions that we will outline in this conference call.

With that in mind let me get into some of the second quarter results.

Revenues grew for the second consecutive quarter to $278 million with the exception of industrial, all market revenues were up sequentially.

Particular strength came from the wireless, computing, and automotive markets with all product families showing growth in these areas.

Consumer and networking revenues were slightly up sequentially in the second quarter with industrial revenues experiencing a slight decline of 1%.

From a regional perspective, the strength in Asia continues as revenues grew 10% sequentially in the quarter.

China is fueling this growth as we leverage our long-standing and increasing presence in the country.

I'll provide further details on our growing success in China a little later in the call.

The America's region grew 4% sequentially in the quarter with the automotive and wireless markets contributing to this increase.

Europe and Japan revenues were down 7% and 6% respectively in the second quarter from the first.

Our 13-week backlog grew for the second consecutive quarter with all product families and regions experiencing sequential growth.

The strength seen in Asia this year is positioning the region to become our largest revenue generator as Asia's 13-week backlog has now surpassed the America's region.

This is further evidence of how we're driving success through our global strength.

I'd like to highlight some of the exciting new products that we've introduced in the second quarter with the particular emphasis on power management solutions.

To engage the portable and wireless arena, we introduced our MCP1500 for use within the base ban and digital signal processing power supplies found in all portable devices.

To address the high performance switching needs and the industrial computing and communications market we introduced a family of FST or Fast Switching Technology logic devices.

We strengthened our position in the delivery of complete power management solutions for advanced microprocessors with the introduction of another new two-face controller.

Also this quarter we introduced the industry's first four-line protection device to meet the universal serial bus 2.0 requirements for high-speed data lines used in computing platforms.

This device is founded on our microintegration technology, by the way.

We also expanded our logic portfolio with an ultra small switch multiplexor designed to meet the needs of automotive and industrial markets.

We continue to prepare for future growth in the area of high frequency data management for telecommunications as we increased our portfolio of silicon remainings devices that leapfrog competitor ECL offerings and performance.

This quarter we introduced the industry's first 10 gigabit per second variable swing driver receiver based on our [INAUDIBLE] technology.

From a customer standpoint our customer base throughout Asia continues to grow.

Key to Asia is the fact that we are experiencing numerous design winds with the domestic and international manufacturers in China.

PCL, China's largest manufacturer of color televisions selected our MCP 1200 to provide the power management function for its latest digital video broadcast system.

Higher, China's second largest domestic electronic equipment manufacturer is using our 44608 controller to produce the standby power consumption of its popular 29 inch color TVs.

The Shanghai SVA group has designed our 1200 modulation controller into its latest dvd player to meet the power management function of that popular consumer device.

And to provide battery management function in its latest MP3 player, Inventech selected our 1800 power control function for use in that particular application.

In addition, [Woway] has chosen numerous of our high speed ECL devices for its advanced broadband switch platform. one of our significant competitive advantages in the computer market is that we provide a complete power management solution, controllers, drivers, and power Mosfets as well as our standard components for advanced micro processors this.

One of our significant competitive advantages in the computer market is that we provide a complete power management solution, controllers, drivers, and power Mosfets as well as our standard components for advanced microprocessors.

This enabled us, in the second quarter, to us win some key sockets on motherboards at Samsung, DFI, NEC and Greatwall.

This is a strong list of customers from across Asia with a focus on China as we continue to see -- as you can see from this list, winning significant business in China where a longstanding relationships and integration strategy played a key roam is driving a great deal of success for the growth of the company.

We continue to maintain our great reputation with our customers by providing world class service and support.

Our efforts in this area have earned us awards this quarter from Bosch, Selestica, JBL, Sony, and Solectron.

Now for more insight into our financial results, John Kurtzweil, our Chief Financial Officer, will provide an overview of the second quarter results.

John?

Thank you, Steve.

Our second quarter results illustrate the continued momentum in our business as we improve to revenues, margins, and backlog for the second consecutive quarter.

Analog revenues led all product families growing 7% sequentially to 93 million with broad market strength.

Notably, in automotive, wireless, and computing.

Similar strength was seen in our MOS power revenues which grew 4% sequentially to 36 million, followed by standard component revenues which grew 3% sequentially to 130 million dollars.

High frequency or ECL revenues were 17 million in the quarter down 5 million sequentially, reflecting the ongoing slowness in the networking space.

ASPs were mixed at the product level with ECL and MOS power ASP increasing the quarter while analog and standard components showed slight decreases of 1 &2% respectively.

The overall affect was a 1% sequential decline in ASP signaling to us, some stability in the market at this time.

Gross margin continued to climb in the second quarter, improving 580 basis points sequentially to 27.4%.

As we realized further gains from our cost restructuring and increased factory utilization.

On the cost side, we realized an incremental $13 million of cost savings versus the prior quarter.

10 million of which came from costs of goods sold.

As of the end of the second quart he, we completed actions to achieve an estimated 340 million of annual savings as compared to the first quarter of 2001.

We are in good position to hit or exceed our target of $360 million.

These cost savings continue to drive down our operating expenses which were lower than addition 5% sequentially in the second quarter, excluding restructuring and other charges.

All of this helped to us reduce our pro forma and net loss to 22 million or 14 cents per share.

That's compared to a pro forma net loss of 26 cents per share in the first quarter.

The second quarter pro forma results excluded -- exclude restructuring and other charges in an extraordinary loss on debt prepayment.

Including these items, the net loss was $32 million or 19 cents per share.

As compared to a net loss of $50 million or 30 cents per share in the first quarter.

During the second quarter we successfully issued $300 million bond offering where we used the proceeds to pay down senior bank debt to further strengthen the balance sheet, with much less restrictive debt.

We do not have any significant debt payments before 2005.

An extraordinarily loss of 6.5 million was incurred associated with the bank debt prepayment.

We also incurred net restructuring charges of 3 million consisting of worldwide restructuring charges of $15 million partially offset by a $12 million gain.

The worldwide restructuring charge is covered asset impairment, workforce reduction costs and supply termination costs.

The cash portion of the worldwide restructuring charge was $7 million with $2 million paid during the quarter.

The cash portion of the gain previously mentioned, was $11 million and was all received during the quarter.

Looking at the working capital, an important fete was accomplished in the second quarter of 2002.

Which to me is a true highlight of the quarter.

Positive cash flow.

As a result of the collective efforts across the entire organization we exceeded our initial revenue and cost reduction expectations to generate positive cash flow one quarter ahead of plans.

Cash and cash equivalence increased 20 million sequentially to $168 million.

Inventory was lowered by 10 million in the second quarter to 160 million or 72 days on a cost basis.

Distributor inventory was sequentially flat in the quarter and remained in the 15-week range.

Day sales outstanding were reduced in the quarter to 39 days from 45 in the prior quarter.

In summary, we had a solid second quarter with fundamentals continuing to improve.

We are successfully completing our major restructuring program as produced outstanding financial results in a short period of time.

These efforts have strengthen our competitive position and provided excellent momentum for us going forward.

Regarding our third quarter outlook, we accept total revenues to be flat to up slightly with gross margins increasing 100 to 300 basis points and operating expenses remaining flat to slightly down from the second quarter.

This includes further realization of our cost-saving activities that we will continue to implement during this time frame.

I am confident that we have all the key elements in place to maneuver through a hazy second half of the year.

With that, I'd like to turn it back to Steve to wrap up and lead us into the Q&A.

Thanks, John.

In summary, most of our cost restructuring projects are coming to a close now.

And the results are astounding.

We definitely believe that we started early and completed proper cost positioning for the company going forward.

We've lowered the financial floor of the company and returned to positive cash flow.

In addition, we've created a much more efficient manufacturing structure for the company going forward.

We're seeing backlog growth in a very limited visibility market.

New products are generating solid design winds.

We're leveraging our lead position in China.

And going forward revenue and share gain will be the focus for the company.

With that we thank you for your time.

We'll open up the lines for Q&A now.

Sean?

Thank you.

At this time we will open up for the question and answer session.

If you have a question, press star one on your telephone touch pad.

And if you're using speaker equipment, lift your handset prior to pressing star one to cancel, withdraw the question, press star two.

Once again, that is star one if you have a question.

And star two to cancel.

One moment while the questions register, please.

The first question comes from Mark Edlestone with Morgan Stanley.

Thanks very much.

This is John Cross for Mark Edlestone.

Congratulations on the progress.

If we could talk about-- you talked about 13-week -- backlog.

Is that the trend on 26-week backlog?

26-week backlog also continues to grow.

We really concentrate on 13 weeks because it's more reflective.

However, the 26-week backlog for us -- if you look into Q4, it is unquestionablely stronger than what Q3 was at the same point and time.

Great.

What is factory utilitization?

Factory utilitization for the quarter was about 82% compared to last quarter.

OK.

And what's the break even level on revenues?.

We think the break even level -- this is John Hughes.

Somewhere between 300 and 310 million right now.

Ok.

You think that's possible to hit in the second half of the year?

If the economy picks up, I think we definitely have a real good shot at it Steve?

Certainly, that's the maniacal focus of the internal organization right now.

Thanks very much.

Thank-you.

The next question comes from Thor Slonberg, U.S Bank Piper Jaffray.

Yes.

Good afternoon.

Steve, you mentioned that ASPs -- or maybe John said ASPs were down 1% for the quarter.

If you look at your backlog of orders, what's the pricing trend telling you?

Right now we're looking at third quarter being slightly up so we think that we have reached stability.

We are actually building our model around a flat ASP quarter on quarter.

But at present the backlog looks maybe 1% above that.

Very good and could you also talk a little bit about the terms environment, how much it was last quarter and how much you expect for your guidance going forward?

We typically run in the 17-22% range in terms of turns.

And that's driven by the fact that we've recognized our EDI as part of the backlog.

We still think we're in about a 20% turns environment right now.

Very good and just looking a little bit at the deliniarity of the quarter, any end markets that were lumpy?

Did you see any strength towards the end of the quarter in any market?

I guess strengths and weaknesses from a computing standpoint.

I think that everybody is seeing a little bit of a softness in the computing market.

However, recognize that we grew dramatically.

I think that's a good example of our commitment that we made 3 quarters ago that we were going to aggressively attack winning in the power management space for motherboards.

So we grew 8% in that market.

But it is relatively soft right now.

We are still showing positive signs.

The wireless marketplace, we've got a few large customers that are doing quite well right now.

Automotive is still very stable.

And mature for us.

So we're enjoying some success there.

And in the consumer space, the consumer space is showing some strength as well.

It's important for everybody to understand that the July-August time frame is the gut check time for third quarter.

As the Europeans go on holiday and we get into the automotive transition.

So September is going to be a real interesting point as to how the third quarter really fills out.

Very good and again, great job on cash management.

Great.

Thanks.

Good talking to you.

The next question comes from Jeff Harleb with CSFB.

Good afternoon.

Hi.

In terms of the backlog, you said the increase.

Can you say about how much in increase during the quarter and how much of your Q3 revenues are covered by that backlog, approximately?

The Q3 backlog right now is showing very modest, only a couple percentage points.

Fourth quarter over third quarter is stronger though.

I'm sorry.

Initially I meant Q2 verse Q1.

The Q2 backlog?

Yeah.

I think we pointed out in the call that it was up --

It was up about 10 million.

From this point last quarter to this point this quarter it's it was up about 10 million.

Ok.

And in terms of how much of that backlog or I should say how much of your Q3 sales is covered by that backlog?

Going into the quarter we were about 80% covered.

Ok.

Fine.

And in terms of the new products, where do you stand on that?

Any -- in terms either percentage or revenues or number of new products versus reasonable trend?

We're still in the 19-20% range of revenue coming from new products.

However, we do see some excitement going forward with some of the wins we've gotten in the computing space and the consumer space in particular.

So we're relatively flat from last quarter in our performance of revenue from new products.

Ok.

And in terms of the sell-in vs. sell-through, where do you stand in the second quarter and how are you looking at the third quarter?

This is John.

The sell-through judgment for this quarter was basically flat.

Our expectations as this coming quarter it will be flat as well.

So utilitization is probably pretty stable?

Right.

Ok.

And just some balance sheet or cashflow items.

Do you have depression, amortization, Cap-X during quarter and also cash restructuring cost for the rest of the year?

The cash restructuring cost for the rest of the year is probably about 17 million to go.

For the depression it was about 32 million.

That doesn't include goodwill?

3 million on top of that for the amortization.

OK.

And no change in your Cap-X guidance?

Cap-X was about $8 million.

Great.

Thanks.

Thank-you.

The next question comes from David Phipps with JP Morgan Chase.

Thank you.

I just want a followup a little bit.

The seasonal patterns you see.

Europe typically slows down in August.

Are you seeing an earlier slowdown this year?

And kind of the same question applied to autos.

And then if we look into China, a market you've talked about some significant growth, how does their seasonal pattern happen on the July-August-September time frame and how is the quarter starting to play out?

Europe, first.

Europe definitely is in their lag from U.S. and Asia in terms of performance so they started slowing down toward the end of the first first quarter.

We did see some positive growth for us in the particular areas that we're encouraging.

But Europe is definitely in that lag period and is pretty slow right now.

From a standpoint of automotive, we have not seen a tremendous amount of slowdown to date from automotive customers.

It appear that potentially they're going manage their transition of model changeover a lot more effectively.

From China's standpoint, we still see good, solid growth activity in China for the first half of the year.

They were not far from about 70% of our total growth.

So we see good positive momentum.

However from a seasonal standpoint, it's hard to tell what China is going to do being the fact that they are so new to being a dominant player in the marketplace.

And if you look in terms of some seasonal patterns, is that part of where some of your wins are going to help out in the PC and consumer space in the second half of the year or are these just other projects coming to fruition?

I think that China is going to play a big role.

And definitely consumer and probably computing.

If we continue to gain sockets and gain share are going add to the strength of the second half for us.

And on a subsegment basis would you imagine the analog business would be the strongest for the remainder of the year?

Or at least the third quarter?

Certainly we're counting on analog show going good growth.

We're also experiencing very good success in our MOSFET business.

But even our standard components, there are areas where we've got fairly substantial demand and are enjoying some good success there as well.

But yeah, analog definitely has got to be our flagship.

Finely, just to be clear on the guidance.

Your modeling for flat ASP though the backlog positive by about 1%.

And the gross margin improvement will come largely from flat pricing and a few more savings that roll in.

And on top of that we can expect some modest improvements in the operating expenses?

That's correct.

Thank-you.

Good quarter.

Thanks, Dave.

Thank you.

The next question comes from Matt Zolin with Lehman Brothers.

Good afternoon.

What were your operating cash flow be when you report your cash flow statement?

And also, the debt increase in the quarter.

Is that --

This is John.

The operating cash will be about $29 million.

Then the extraordinary losses, really the write-off of the T's associated with the bank debt that we paid down.

And on your inventories, you mentioned 15 weeks at distribution and obviously you took inventories down on your balance sheet.

Do you do your inventory that sort of bottom level or is there more you can pull out of there for cash flow?

Our operating range for the DISD's is in the 13-15 week range.

We have seen them moderate if there's any sluggishness into the third quarter, the DISD's from the resale standpoint have not been stellar.

And so we expect that we will hold that inventory in the 14-15 week range through the third quarter.

From our standpoint right now, we don't expect to lower inventories in the third quarter.

We expect to stay flat.

And your sales were up in the quarter.

But your cash flow would have even been higher had you been able to maintain your payables.

What was the trend there for, declining?

On the trend there, what we had is we had some pension fund payments that we were required to make.

It was almost $10 million.

Great.

Thank-you.

Thank-you.

The next question comes from David Bitterman with Deutsche Bank.

Good afternoon.

Couple things.

One is, there had been a couple of changes on the management side on the analog business.

I was wondering if you had any comment there.

Second question is -- on -- historically you've given some level of guidance on free cash flow for the remainder of the year if my memory serves me correctly, I think you're looking for about 50 million of free cash presumably for debt reduction in the second half of the year.

Is that still the right thinking for you guys?

I'll take the management team change and then John can respond to the free cash flow question.

From a management standpoint, we've made numerous management changes.

We have a new division General Manager as of December of last year running the analog business.

His name is Mike Heightsman [ph].

That particular change is working out extremely well.

I think well represented by the growth we're having in our analog business as well as the momentum of our new products.

So a very positive change.

And we're excited about the future of the analog power management business.

And for that free cash flow, we should see somewhere between $15-20 million of cash provided by operations.

Each quarter for now through the balance of the year.

Then we have about $10 million -- $10-$15 million of capital to go.

Excuse me.

$20 million of capital to go.

So we should see somewhere in the range of $20-30 million of free cash flow between now and the end of the year.

Very good.

Thank-you.

Thank-you.

Thank-you.

At this time we are out of time for the question and answer session.

I would like to turn the conference back over to the host for any closing statements or remarks.

Thank you, Sean.

I want to thank everybody for being with us today.

I'll just emphasize that we're doing what we said we would do.

The momentum that we have gained through the restructuring process I think is clearly paying off in terms of our operating performance.

We do see a very choppy market out there with limited visibility.

But we think we're making ground and gaining share in critical areas.

With that I look forward to talking to everybody in the end of the third quarter.

Thank-you very much for joining us today.

Once again, we would like to thank everyone for attending today's conference call.

Have a pleasant day.